Fortinet Stock: Could Continue to Outperform Long Term

Fortinet (FTNT) provides cybersecurity solutions to companies, governments, and other entities globally. The company’s offerings include firewalls, filtering, malware protection, virtual private networks (VPNs), and several others.

Cybersecurity threats are rising, and there is no indication that the danger will wane anytime soon. Organizations must secure their assets and information, and cybersecurity budgets are increasing as a result. Fortinet reports that its total addressable market will reach $174 billion by 2025.

Fortinet stock dipped along with the overall market in the early days of 2022. Fears over rising inflation leading to increased interest rates took their toll on growth stocks.

Because of this, Fortinet is down over 9% year-to-date (YTD) and sits well off its 52-week high. Robust earnings reports from several technology companies seem to have stemmed the tide, and tech stocks have begun to recover. This may mark an opportune time to invest in Fortinet stock.

Compelling Metrics

Fortinet has several advantages over other growth and cybersecurity stocks as an investment. First, Fortinet is GAAP profitable. Many companies in the cybersecurity space are high-growth but lack profitability as they scale. Fortinet breaks this mold.

According to the company, it has been profitable and produced positive free cash flow each year since 2009 – a remarkable streak. Margins are strong, with an operating margin of over 26% on a non-GAAP basis and over 19% on a GAAP basis in Fiscal 2021.

Fortinet is also truly global and reports over 550,000 total customers. The company has a strong presence in North America, Europe, and the Asia Pacific. This diversity provides stability for the company’s earnings.

Fortinet is not a pure software-as-a-service (SaaS) stock. The company earns revenue from both hardware and software. In Q4 2021, nearly 40% of revenues were from product sales rather than services. Service revenues are often more favorable as they are generally recurring and have higher margins. For this reason, many investors favor cloud-based providers such as CrowdStrike (CRWD) or Zscaler (ZS).

2021 Financial Results Are In

Fortinet reported full-year Fiscal 2021 results on February 3, 2022. Revenue continued to grow, rising 29% over 2020 to $3.34 billion. This is an acceleration of revenue growth. Revenue grew only 20% from 2019 to 2020. Accelerating revenue growth is highly encouraging for investors.

Even better, bookings and billings rose 40% and 35%, respectively. This leaves the company with $3.45 billion in deferred revenue. Deferred revenue represents payments that have been collected but not yet captured as revenue as the revenue has not been earned.

For instance, if a customer pays upfront for a full year of services, the revenue is deferred until earned throughout the year of service. Generally, the higher the amount, the better. Fortinet’s deferred revenue is very healthy and grew significantly in 2021.

Net income for 2021 came in at $607 million on a GAAP basis. The is an increase of 24% over 2020. Cash flow was also impressive in 2021. Cash flow from operations (CFO) increased to $1.5 billion from $1.08 billion in 2020. Parsing this out, the company posted $0.45 of CFO for each $1.00 in revenue in 2021. This was an increase over 2020 when the company reported $0.42 in CFO for each $1.00 of revenue. This speaks to a rise in efficiency in 2021.

The company used some of this cash flow to repurchase its stock. In 2021, Fortinet spent $571.8 million of cash on share buybacks. This amounts to about 1% of the current market cap.

Share buybacks offer several advantages for investors. First, they reduce the number of shares available, so each share represents a larger portion of the company pie. This causes earnings per share to rise.

Next, they mitigate the dilutive effects of stock-based compensation (SBC). In the case of Fortinet, the buybacks easily outpaced the rate of SBC. Finally, the company can purchase shares when the price of the stock dips, which supports the value of shares on the open market.

As the stock has dipped thus far in 2022, look for share buybacks to increase when Q1 Fiscal 2022 earnings are released.

Wall Street’s Take

Over on Wall Street, analysts are bullish on Fortinet’s stock, with a Moderate Buy consensus rating. This consensus is based on eight Buys, eight Holds, and one Sell rating. Many Hold ratings indicate that many analysts believe the stock is reasonably valued.

The average Fortinet price target of $356.29 implies 10.2% upside potential.

Fortinet to Benefit Long-Term Investors

Fortinet is in an enviable position in the cybersecurity space. It is a global player, highly profitable, and generates tremendous free cash flow. Perhaps the most compelling metric is accelerating revenue growth. The stock currently trades at a forward price-to-sales (P/S) ratio of 12.4, which is lower than it traded in the latter half of 2021.

The stock does carry some risk as the cybersecurity industry is highly competitive and constantly evolving. Despite the competition, Fortinet reported terrific results for Fiscal 2021 and has a long runway for continued growth. Fortinet stock has risen ~100% over the past year, and this market outperformance is likely to continue for long-term investors.

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